Business Advisor: April 2013

Preparing to put your business up for sale involves much more than
sprucing up its curb appeal and tending to the organization and
cleanliness of the facility.

Preparing to put your business up for sale involves much more than sprucing up its curb appeal and tending to the organization and cleanliness of the facility. Clearly, these are important factors to create a positive first impression. However, there is a substantial amount of planning that should take place well in advance of exposing your bakery to potential buyers. While the preparation process can be time consuming, the five steps reviewed in this article can significantly maximize the value and increase the realized price for your bakery.

Step 1: Update and normalize financial statements
One of the most important information items that potential buyers will be relying on is your company’s financial statements. If they are unaudited, you may want to consider upgrading the quality of the financial statements to an audit. The key advantage of audited financial statements is that financial information will have more credibility in the eyes of the buyer and may enhance the value of your business.

The business owner and advisors must have a good understanding of the reasons for fluctuations in revenue, gross profit percentages and expenses from year to year. Furthermore, it is a good idea to normalize the historical financial statements to show the true profitability, by adjusting for certain items, including:

• Nonmonetary management remuneration and bonuses
• salaries paid to non-working family members
• benefits paid on the owner’s behalf that would likely not be incurred by a buyer
• non-recurring expenses

Step 2: Prepare projections
A well-reasoned and realistic business plan incorporating a projection of future profit for the next one to three years can result in a significant increase in the value of a company. Therefore, such projections are an excellent vehicle to paint a picture of the future plan for the business and specifically identify growth opportunities.

The preparation of projections may allow you to demand better terms, as it may convince buyers of the growth potential of the business. A properly prepared business plan and projection may also enhance the buyer’s ability to secure financing for the purchase.

Step 3: Gain an understanding of the value of your business
An outside valuation of your business has the following advantages:

• prevents leaving money on the table by undervaluing the business
• helps the buyer decide whether or not to sell
• provides a benchmark for evaluating bids for the business
• provides an understanding of the value drivers of your business – which can enthuse prospective buyers about your business and indicate which drivers are currently “weaknesses” that need to be addressed prior to sale

One of the most effective ways to enhance the value of your business is to take the current weaknesses in the business and change them into positive factors. For example, changing a bakery with a high percentage of sales derived from a few large customers, to one with a broader customer base can result in a significant enhancement to the value of the business.

Step 4: Plan for the tax consequences of a sale
It is imperative that you consider the tax implications of a sale well in advance. For example, if the shares of the business are shares of a Qualified Small Business Corporation (QSBC), a sale could qualify for a $750,000 capital gains exemption. If the shares do not satisfy the criteria because some of the assets are not be used in an active business carried on in Canada (marketable securities, real estate, excess cash, etc.), it may be possible to “purify” the company by transferring these passive assets to another corporation.

You should also consider whether it is more advantageous to sell shares or assets. Vendors usually desire to sell shares, primarily to obtain the capital gains exemption. On the other hand, purchasers usually want to buy the assets of the corporation for two primary reasons: The purchaser will not be responsible for liabilities that are not known at the date of closing and, on an assets purchase, the buyer has the ability to step up the cost base of depreciable property to fair market value, thereby increasing the capital cost allowance available to be deducted against future taxable income.

In most circumstances it is necessary to have held the QSBC shares for a period of 24 months to take advantage of the capital gains exemption.

Step 5: Diversify management talent
Businesses that depend solely on the owner may have difficulty selling and the price of the business will be negatively impacted because of the increased risk from the buyer’s perspective. Therefore, it is critical to broaden the strength of the middle management team to reduce the risks in these areas.

These five steps can significantly increase the likelihood of a successful sale and the selling price.

Bruce Roher is a partner in the business valuations practice at the Toronto office of Fuller Landau LLP, Chartered Accountants. He can be reached at broher@fullerlandau.com or 416-645-6526.